Top 3 Questions Every Breakaway Advisor Asks – Part 2

June 15, 2017, by Larissa Marcontell Sonnen

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Wirehouse advisors do not launch RIAs on a whim. After years of toiling away in the captive employee model, building a book of business and having the privilege of earning client trust and loyalty, they have a pretty good gig going. Many advisors, rightfully so, have the attitude that the devil you know is better than the devil you don’t. But as the RIA industry continues to gain client assets (see described Cerulli report) and more and more wirehouse advisors make the switch to the independent model, curiosity tends to set in, and advisors begin to focus on three questions:

Should I Stay?

Should I Go?

If I Go, How Do I Do It?

We covered question #1 in our previous post (see: Part 1) and all the legitimate reasons an advisor would choose to stay an employee at a large bank/brokerage firm/wirehouse. Here, I would like to focus on what drives advisors to take that leap of faith and finally determine that the grass is in fact greener on the other (independent) side.

“Should I Go?” or “Why Go Independent?”

The one thing keeping wirehouse advisors in their current position is the thought that the large brand behind them is important to their clients. For every advisor seriously considering starting their own RIA, they have given up on the culture/brand that they have been displaying on their business card for the duration of their careers. Many Merrill Lynch advisors feel that Bank of America has ruined the “thundering herd” brand that they proudly joined decades ago. Often, UBS advisors are frustrated with foreign ownership and the uncertainty surrounding the long-term plans for wealth management at the parent firm. Many Morgan Stanley advisors have been upset for years following the cultural integration issues of the Smith Barney merger. And most Wells Fargo advisors are running from the negative headlines surrounding the cross-selling and illegal account opening scandal that rocked them last year.

On top of that, the compensation grid always seems to change in favor of the wirehouse and against the advisor. Those looking to become business owners are seeking operating leverage for the first time in their careers. Top advisors within the wirehouse community are paid on a 42% payout grid, which means for every dollar of revenue their clients produce, the advisor takes home 42%. In contrast, RIAs can attain profit margins of 65% – a 23% increase in take-home pay from the wirehouse model. Additionally, profitability increases for every new dollar brought in, as opposed to the fixed 42% payout at the wirehouse. When advisors fully embrace the concept of operating leverage and the ability to expand profitability as a business owner rather than an employee, they get very serious about the RIA model.

Advisors contemplating Independence are also excited about the prospect of improving the technology tools used to deliver their services to clients, as well as the ability to report and advise on all client assets, regardless of where they are held. By removing the compliance handcuffs and implementing fairly basic aggregation software, the RIA advisor is able to pull in outside assets onto the client’s quarterly performance reports, which immediately elevates the advisor in the mind of the client – for the first time in his/her career, the advisor is able to truly advise on the client’s entire net worth, including the liability side of the balance sheet (see PFI Advisors’ white paper: “Innovative Lending Solutions in the RIA Space”).

Speaking of Compliance, top advisors are exhausted from the internal battles that result from the fact the branch offices are built around and managed to the lowest common denominator. It is quite common for advisors to go to management with an investment opportunity they would like to show their clients, only to be told that while they might be able to offer this in a compliant fashion, management fears that the younger advisors in the office would get everyone sued if they tried to offer this sophisticated investment to their clients. Since investment opportunities must be offered uniformly by all advisors to their clients, this frustration occurs more often than not when a top-performing advisor tries to find innovative solutions for their clients.

The idea that compliance at an RIA can be structured to protect the client and the advisor, and not solely to protect the firm, is very appealing to wirehouse advisors. Knowing that the marketing roadblocks will be removed around social media and the ability to market themselves as a distinguished firm rather than individual employees of a larger organization with identical web pages every other advisor has under the shared brand, makes these advisors ecstatic. They will have the freedom to position themselves and brand their RIA to their unique niche, finally differentiating themselves from the competition.

Succession planning and the opportunity to build a brand and a firm with legacy is very attractive to advisors who are considering the move to Independence. While some advisors have a hard time seeing past the short-term benefits of a large recruiting check from another wirehouse, it has been proven that the long-term economics favor starting an RIA and building equity over time. Mindy Diamond recently published a research piece spelling out the math for advisors considering making a move: (”The Math Behind the Move to Independence”). PFI Advisors has written about it in the past as well: (“Long Game of Starting an RIA”). Advisors are opening their eyes and doing the math for themselves.

In the end, the biggest thing on the mind of an advisor about whether to start his/her own RIA is the sheer excitement to finally own their own destiny. They now control who their clients are, what they can charge their clients, what products and services they feel best serve their clients, where clients hold their assets, and what product providers offer the best solutions for their clients. Regardless of the current state of the Fiduciary Standard in Washington, advisors attracted to the RIA industry feel that they must make this change if they want to best serve their clients.

Once this decision has been made, there is one last question on their minds: “How on earth do I do this?” That question will be answered in my next post!